Portfolio Diversification and Volatility Spillovers between Energy Stocks and Fossil Fuel Energy Commodities

In this thesis, we investigate the volatility spillovers among major energy stocks, the electricity index, and fossil fuel energy commodities (crude oil, natural gas, and coal) using firm-level data in an emerging market, Turkey over the period July 18, 2006–December 31, 2021, which covers important economic events worldwide. To do this, we employ [1] Diebold and Yilmaz’s (2012) approach to examine both time-varying and invarying volatility spillovers among markets. Our findings reveal that Turkish energy stocks and the fossil fuel energy markets have high interdependencies, which are significantly affected by global political, financial, and extreme events. The volatility spillovers among markets during the COVID-19 outbreak in 2020 exceeded the 2008 global financial crisis. We also examine the volatility connectedness between markets based on frequency domain using various frequency bands (short term, medium term, long term). To do so, we adopt [2] Barunik and Krehlik’s (2018) approach and find that the highest performance is recorded in the long horizon compared to short and medium horizons, implying that the impact of volatility spillover transmission from one market to others is persistent (long-lasting) in the Turkish market. Finally, we calculate dynamic conditional correlations (DCC-GARCH), hedge ratios, and optimal portfolio weights for Turkish energy stocks, the electricity index, and fossil fuel energy commodities (crude oil, natural gas, and coal). Implications for both governments and global investors are provided accordingly based on our results.